Prices were stuck in a
$50 trading range until the Fed sent the dollar
reeling

The U.S. Federal Reserve gave gold the fuel it
needed to restart its engine and the precious
metal has already driven through the trading
range barrier it's been stuck in for the past
month.

Gold futures had been trapped in a $50 trading
range between $860 and $910 an ounce on the New
York Mercantile Exchange since May 28. It
climbed past $920 in electronic trading Thursday
evening as the U.S. dollar slumped in reaction
to the Fed's failure to signal urgency to raise
rates to curb inflation.

On Wednesday, the Fed decided to hold short-term
interest rates steady at 2%, but sharpened its
focus on inflation, saying that the risks posed
to the economy by upward pressure on prices have
increased. See full story.

"Gold broke decisively out of the trading range
that had constrained it as investors came to
realize that the Federal Reserve won't be able
to begin a rate-hike campaign until 2009," said
Brien Lundin, editor of Gold Newsletter.

'Buy gold! Buy silver! Buy them because they're
the only defense against what's happening in all
the other markets.'
— Dale Doelling, Trends In Commodities

The Fed's policy statement essentially
acknowledged the "trick box" the central bank is
in -- "facing growing inflationary pressures,
but unable to raise rates while economic
conditions are so weak and with a national
election so near," he said.

That combined with growing expectations that the
European central bank will begin its own rate
hikes well before the Fed can act to create a
bearish environment for the U.S. dollar which in
turn, provided a very bullish outlook for gold,
he said.

"People are finally coming out of the fog and
realizing that we're in a world of hurt and
people are plain scared," said Dale Doelling,
chief market technician at Trends In
Commodities.

"Stocks are in the toilet, the dollar is getting
hammered, oil is going through the roof, food
commodities are in the stratosphere [so] there's
only one solution," he said. "Buy gold! Buy
silver! Buy them because they're the only
defense against what's happening in all the
other markets."
Fed muck

The Fed's in quite a predicament as it tries to
help improve the economy and most scenarios
point to higher prices for gold, analysts said.
Video: Rally in gold futures

James Steel of HSBC says that record-high crude
oil and dollar weakness are boosting gold
prices. (June 27)Fed Chairman Ben Bernanke is
"caught between wilting growth and rising
inflation," said Julian Phillips, an analyst at
GoldForecaster.com. "With such toothless words
against inflation, their rate-holding action
told [everyone] that they can expect no interest
rate support for the dollar in the foreseeable
future."

"This is positive for precious metals," he said.

Gold's value as a hedge against inflation --
especially as it pertains to a weakening dollar
and rising oil prices -- helped lift prices for
the metal to nearly $1,034 an ounce in
mid-March, the highest futures price level ever
recorded.

'Inflation is a lot like toothpaste -- once it
is out, it is very hard to get back into the
tube.'

— David Beahm, Blanchard and Co. Inc.
And with ongoing concerns about inflation and a
slowing economy, gold may be poised to return to
record territory, analysts said.
"Inflation is a lot like toothpaste -- once it
is out, it is very hard to get back into the
tube," said David Beahm, a vice president at
coin and precious metals retailer Blanchard and
Co. Inc. And gold is a "tremendous hedge to both
protect wealth during these inflationary periods
and also generate positive investment returns
when other asset classes decline in value."

The Fed's policy statement noted "two situations
weighing on the economy: tight credit and the
housing contraction -- that could be best
addressed by an accommodative monetary stance,"
said Lundin. But at the same time, it noted just
one, high energy prices that could be combated
by a tighter monetary policy.

Crude prices climbed near a record $140 a barrel
earlier this month and U.S. retail prices for
regular gasoline stand near an all-time high
above $4 a gallon.

"In short, they're damned if they do and damned
if they don't," said Lundin. The Fed can only
talk inflation down and talk the dollar up for
now. "It won't be able to take any real,
substantive action until after the fall
elections."

Dollar doom is gold's boom
Of course, at the root of the issue for gold is
the dollar, Lundin said.

"Whatever developments drive the greenback will
send gold in the opposite direction," he said.

The Fed can protect the U.S. dollar by sharply
increasing rates, but that would sink the
economy and make servicing our huge debt loads
unmanageable, said Peter Spina, an analyst at
GoldSeek.com. So the Fed "must keep rates low
and keep liquidity in the system, which will
ultimately lead to further debasement of the
dollar's value," he said.

Protection for the dollar can really only come
in the form of confidence or perception and then
capital controls, he said.

Spina said he senses "increasing desperation" on
the Fed's part and if the economy hasn't
recovered as we enter 2009, "the confidence game
could unwind quickly."

The Fed is "in a corner and the U.S. dollar is
going to be a victim of their policies," Spina
said. "It already has been punished harshly."
See full story.

No all-clear flag quite yet

Still, the market hasn't yet set out the
all-clear flag for gold to move up.

August gold futures need to close above $940
before we have a technically significant
breakout, said Trends In Commodities' Doelling.

Erik Gebhard, an analyst at Altavest Worldwide
Trading, said the metal needs two consecutive
price closes over the $920 area to "signify a
lasting break to the upside."

But a break through the downside support near
$864 would likely send prices below $800, he
warned.

That's not impossible. If one of the central
banks -- be it the European Central Bank of the
Fed -- move on rates, the "currency logjam would
break at that point too," said Jon Nadler, a
senior analyst at Kitco Bullion Dealers.

"Or it could be that crude oil finally breaks
down and comes down to reality -- either one of
these events are enough to get gold down to $800
(or $770), and we better hope that bargain
hunters step in at that time," he said.

Beahm admits there are quite a few things that
could send gold prices below $850 -- including a
strengthening economy, a slowdown in emerging
markets, a rise in mining production and a fall
in demand, inflation, oil prices and global
tension. But he said none of those are likely.

Doelling said he'll stick with his prediction of
gold above $1,350 by the year's end and silver
at $25.

"I think you and I both have a better chance of
winning the Lotto than metals prices have of
falling at this juncture," said Doelling.